The Chimera of Chinese Investment in Russia’s Far East Ports

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China has no port of its own on the Sea of Japan, and Russia could use this to its advantage. But for Russia to attract Chinese cargo, it is essential to simplify customs controls and seriously invest in roads and ports. Considering that both of these factors are Russia’s responsibility, the completion of the Primorye transport corridors has been stalled for a long time.

Ahead of Chinese leader Xi Jinping’s visit to Russia on July 3-4, Russia’s Ministry for the Development of the Far East announced an intergovernmental agreement on the development of the Primorye 1 and Primorye 2 international transportation corridors. This is not the first time these corridors have appeared on the Russian-Chinese agenda. There is hope that they will be powerful stimulants for the local economy, but there are also doubts about their prudence as investments; particularly surrounding the level of demand.

The Primorye 1 route connects the Chinese province of Heilongjiang to the Russian port cities of Vladivostok, Nakhodka, and Vostochny. The loads currently being shipped from China through Primorye aren’t very large: 60,000 tons in 2016.

Primorye 2 is a more promising route connecting the province of Jilin with the small ports of the Khasansky District: Posyet, Slavyanka, and the port in Troitsa Bay, where in addition to the existing infrastructure (with cargo turnover of about 300-400,000 tons per year), Russia’s Summa Group wants to build the Bolshoe Zarubino port that has a planned capacity of up to 100 million tons per year at a cost of at least 200 billion rubles ($3.4 billion).

The concept of using Russian ports for the domestic transport of Chinese cargo from north to south is founded on two premises. First, Chinese internal railroads are apparently overloaded, making the transfer of goods from the northeast provinces to the south difficult and expensive. Second, the port of Dalian at the tip of northeast China is no longer able to manage the volume of cargo, and it’s much further away than the nearby Russian ports.

However, as is frequently the case when Russia-Chinese collaboration moves from high concept geopolitics to specific implementation, difficulties have arisen.

First, data shows that the cargo turnover on Chinese railroads is falling, while the rail network is constantly growing. Second, the output capacity of Dalian’s several ports is 420 million tons per year — a significant figure, even for China’s powerful economy. Third, there are two serious obstacles between Chinese products and the Primorye port: an absence of modern border security posts and cumbersome cross-border procedures, and Russia’s lack of good roads and its underdeveloped port infrastructure.

To realize the dream of attracting Chinese cargo, it is essential to simplify customs controls and seriously invest in roads and ports. Considering that both are Russia’s responsibility, the completion of the international transport corridors has been stalled for a long time.

When the project was first floated, private investors showed interest. In May 2014, during Putin’s visit to China, Summa Group signed an agreement with the administration of the Jilin Province to work together on the construction of Bolshoe Zarubino. During the APEC summit in November that year, another agreement of intent was signed by representatives of the Chinese state-owned company China Merchants Group.

So far, those intentions are not being acted upon. Having failed to receive 80 billion rubles in government funding, Summa froze the port’s construction. Potential investors would like to get some guarantees from Chinese exporters, and the exporters would like to see the port and the road to it.

About 300 billion rubles is needed in order to bring the transport corridors to the capacity described in a plan produced by the McKinsey consulting company at the request of the Ministry for Development of the Far East, and approved by the government. This sum includes port construction (the juiciest part for business) as well as access roads, power lines, and utility infrastructure. Considering the region’s unique landscape, expensive eco-friendly technologies should be used. The new highway from the border to Zarubino will cost at least 37 billion rubles alone, and neither Summa nor the government has the necessary funds. The idea of giving the road to Chinese investors as a concession was discussed, but so far they haven’t shown interest. Overall, the Chinese have been treading very carefully concerning this project.

It’s easy to understand the Chinese perspective. According to McKinsey’s data, a container sent from Mudanjiang, not far from the Russian border, to Shanghai via Dalian completes the journey in 85 hours at a cost of $1,200. Though the distance through Vladivostok is three times shorter, the travel time grows to 220 hours, mostly because of customs procedures. The cost will be 5-15 percent higher.

It’s also unclear whether the cargo evaluations made by the Chinese are accurate. The Chinese districts from which transit to Primorye is closer than to Dalian are economically underdeveloped, forcing these evaluations to be based on theoretical assumptions.

The McKinsey report evaluates potential cargo turnover volume between northeastern and southern provinces of China at 250-300 million tons per year. The goal of the transport corridors is to attract 30 million tons, with a plan to later increase to 45 million. But China is unable to make any guarantee that this volume of cargo will go through the Primorye ports. It’s hard to direct commercial cargo, which answers only to the logic of business, and state-owned companies, which dominate the production of bulk goods, will likely prefer to support their compatriot stevedores at Dalian.

So what benefits does the project offer Russia? Under the current plan, everything revolves around handling Chinese cargo shipped by Chinese transport companies. Even the new railway line to Zarubino should be built with Chinese track, according to Russia’s Ministry for the Development of the Far East. Russia’s role is relegated to providing logistical infrastructure. All profits would come from stevedoring operations and various corollary services.

Three thousand jobs will be created at construction sites, and another 3,000 will work in the ports, if the predictions for Chinese cargo are accurate. The Ministry for the Development of the Far East believes that by 2030, the Primorye region’s GDP would increase by 30%. The real figures will likely be much lower, but is better than nothing.

But there are also risks. First, if eco-friendly methods aren’t utilized during construction, the unique wildlife of the Khasansky District will be damaged. This includes forests that are home to the endangered Asian black bear, Amur leopards and Siberian tigers, as well as the Pacific coastline, which has potential as a tourist destination.

Second, if the corridors are completed on the state’s dime — which looks increasingly likely — it’s probable that billions of rubles will be spent with little efficiency. Even the existing port capacities are underutilized, according to the the McKinsey report.

Everything hinges on finding volunteers to fund the expensive construction. It’s expected that this role will be played by our Chinese friends. In a statement last month, Russia’s Minister for the Development of the Far East, Alexander Galushka, mentioned unspecified “private investors” and made an abstract appeal for a “political decision from the Chinese side.”

The high level of Russian-Chinese cooperation always needs to be proved, both to ourselves and to the rest of the world, via dozens of agreements signed in person during state visits. The majority of these agreements will remain on paper, and maybe that’s no bad thing.